Issues
Increased Taxes on America’s Small Businesses?
Washington, D.C. – U.S. Senator Rob Portman (R-Ohio) recently released a statement responding to President Barack Obama’s call for increased taxes on America’s small businesses.
Senator Portman introduced his statement with these observations:
While President Obama calls for higher taxes on jobs (sic) creators, two new government reports undercut his class warfare argument and the basis for calls for higher taxes…. As the nation careens toward a fiscal cliff, real leadership not more rhetoric and finger pointing, is necessary to reform our tax code and address Washington’s out of control spending.
Analysis of the Congressional Budget Office’s (CBO) final report on what caused the January 2001 projection of a $5.6 trillion 10-year surplus to turn into an actual $6.1 trillion deficit over that 10-year period (ed. note: a $11.75 trillion dollar swing) shows that:
- Tax policies enacted a decade ago are responsible for just 16% of the swing from surplus to deficit, or $1.9 trillion;
- Given that only about one-fourth of the tax cuts went to upper-income earners (indicative of the reality that there are very few of these), just 4% of the decline from surpluses to deficits resulted from upper-income tax cuts, or $490 billion
- Since CBO ignores any of the positive impact of tax cuts on the economy (this is known as “static analysis,” as opposed to “dynamic analysis,” which estimates growth attributable to tax cuts), savings and economic growth, the percentage was actually even smaller than the 4% estimate (above).
Additional analysis of the factors behind this massive $11.75 trillion swing reveals that new spending, (much of which was due to debt incurred because of the new spending and interest) were responsible for almost half (48%) of the increase in spending.
To sum it up, the $11.75 trillion swing from surplus to deficit was comprised of a $6.1 trillion decrease in revenue (52% of the total swing) caused by tax policies, new spending and interest and a $5.6 trillion increase in spending (48% of the total swing).
Of the total spending and revenue lost over the 10 year period, an astounding 34% ($4 trillion) was due to Obama/Pelosi legislation over the last three years!
Senator Portman concluded:
In a second report, the CBO said that in both 2008 and 2009, the highest-earning 20% of taxpayers paid 94% of the total income tax burden – up from 86 %in 2007, and 81% before the 2001 tax cuts. In other words, higher-income Americans have been paying a bigger and bigger part of the total tax burden under the so-called “Bush tax cuts.”
Editors’ note: Due to rounding, the percentages above may not agree with the dollar amounts. For clarity’s sake the editors decided to round dollar amounts to two decimal points and percentages to just one.
The author is a concerned Lane County resident and business owner.
“YOU DIDN’T BUILD THAT!”
Individual Initiative & the American Economy
“YOU DIDN’T BUILD THAT!”
Let’s be fair to President Obama.
The commercial, “These Hands,” a commercial currently being aired by the Romney campaign (http://www.youtube.com/watch?v=4Lr49t4-2b8),quotes Mr. Obama proclaiming during his July 13th speech in Roanoke, Virginia: “If you’ve got a business, you didn’t build that. Somebody else made that happen.”
The quote is accurate, but perhaps taken a bit out of context. The full context is as follows: “If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have, that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen.” (emphasis added)
Perhaps the president simply expressed himself poorly. Possibly Mr. Obama’s statement, “you didn’t build that,” was meant to convey that – alone – entrepreneurs did not build the nation’s infrastructure nor create all the conditions necessary for their success. This is a nice thought. However, there is also the possibility that Mr. Obama truly believes what the Romney commercial implies: that those who succeed under our free enterprise system owe their success not to their own brains, guts and grit, but to government largesse.
Consider what Mr. Obama said immediately after the sentence italicized above: “The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”
But this claim is wildly inaccurate. Government research did not create the Internet, nor was profit an objective of its creation. What the government (which is to say, the American people as taxpayers) did do was provide funding, initially through the Defense Department, and later through legislation sponsored by then-Senator, Al Gore.
No one person or entity invented the Internet, but the research involved was done mainly by universities and private enterprises, notably the Xerox Corporation. The original purpose of the Internet was to link computer research centers. Government research did not create the Internet “so that all the companies could make money off the Internet.” Making money off the Internet was a by-product of the government’s involvement, not the objective; just as the objective of the space program was to put a man on the moon, not to create freeze-dried foods, hand-held cordless vacuums, temper foam mattresses and other consumer products that were spun off from space technology.
It is true that a great deal of the pure research in this country takes place in government laboratories and in university and private research labs with the help of government grants. Mr. Obama had that right. But the government does not identify the commercial possibilities of this research, nor does it make and market successful consumer products; the business community does this. We don’t look to NASA to provide us with temper foam mattresses anymore than we look to the Defense Department to provide us with Facebook.
President Obama’s remarks in Roanoke remind me of an old story about a Scottish minister who arrived to take charge of a new parish. After touring the manse, the minister ventured out into the back yard and was stopped dead in his tracks by the sight of the most beautiful flower garden that he had ever beheld. Rubbing his hands together in sheer joy, he turned to the gardener and exclaimed, “Oh, Davy! Look at what the Lord hath done!”
The gardener snorted and replied, “Aye, Preacher. But ye should have seen this garden last winter, when the Lord had it all to himself!”
The American business community is the gardener in this fable, and President Obama is the well meaning, head-in-the-clouds minister who seems unable to recognize the role of individual initiative, persistence and hard work in the creation of any successful project.
Whether you consider the Romney campaign’s commercial to be fair or not, it has thrown the national spotlight on one of Mr. Obama’s greatest weaknesses – he is an intellectual who has never had to run a business or meet a payroll, and he lacks the practical understanding of how our free enterprise system really works – how individual drive and initiative built the American economy and worked to keep it strong.
Thomas Michael Stewart, a resident of Eugene and former student at Marist and Sheldon High Schools, is currently a senior at Princeton University.
Enterprise Zone will spur job growth in Creswell
By Jacob Daniels
There are a lot of issues being discussed in Creswell. I think it is safe to say that there has been a lot of debate. It is my opinion that the most important issue facing us is the lack of jobs. Lane County unemployment is currently at 8.5 percent; homes are going into foreclosure; families are struggling to make ends meet; and we are all fearful that things will get worse. Times are tough, but if we take the proper steps things can (and will) get better.
At the May 7, 2012 City Council meeting, City Planner Denise Walters and Community Development Director of Cottage Grove Howard Schsesser proposed a Resolution of Consent to apply for an enterprise zone that includes Cottage Grove, Saginaw, and Creswell.
An enterprise zone attracts businesses by enabling eligible businesses to expand or move into the zone and receive total exemption from property taxes for three to five years. After presentation of the proposal and discussion, City Council voted in favor of the Enterprise Zone (with Councilors A.J. O’Connell and Jane Vincent opposed).
An enterprise zone has the ability to stimulate significant economic growth. A recent example is Prineville, Oregon, where an enterprise zone attracted Facebook to build its first data center. Tom Furlong, director of site operations for Facebook told the Bend Bulletin that “The enterprise zone helped direct us to the community.” Jason Carr, from Economic Development for Central Oregon said: “If the enterprise zone didn’t exist in Prineville, this project would not be moving forward.”
Support for enterprise zones is bipartisan. Governor John Kitzhaber is optimistic that the Central Oregon Enterprise Zone will help rejuvenate the natural resources economy.
The purpose of enterprise zones is clear: incentivize businesses to invest in your community. Attracting businesses to Creswell means more opportunities for employment. More employment opportunities for the people of Creswell is something that we can all support.
I’m optimistic that implementing an enterprise zone in Creswell will help bring businesses to two key areas: the former Bald Knob site and the old Foster Farms plant. These two locations were former sources of employment for a significant number of local workers. Foster Farms employed more than 250 people in 2001 and Bald Knob had more than 120 workers at one point.
As of today, the City Council has approved the Enterprise Zone, the Lane County Board of Commissioners has approved the plan, and now all that remains is State approval. All reports indicate that the State will approve the Enterprise Zone. Approval of the plan will be a huge step forward for Creswell. Nevertheless, we can’t stop there… we must continue to work together as a community to find new ways to make Creswell an even better place to live.
As Creswell’s newest City Councilor, I would like the opportunity to meet with you and discuss issues and solutions. As such, I’ve designated Fridays from 10:00am to 2:00pm as “Councilor Office Hours” at my office located at 285 E. Oregon Avenue. I ask that you call at least 24 hours in advance to set up an appointment. I can be reached at (541) 995-0133.
Reprinted with permission from The Creswell Chronicle. Original article can be viewed at the following link http://www.thecreswellchronicle.com/news/story.cfm?story_no=10427
Jacob Daniels is a local attorney, Creswell City Councilor, and a former member of the Oregon Small Business Advisory Council. The views expressed here are his own.
Death Tax Discussion
Editors’ Note: The following is a message from Common Sense For Oregon.
Healthy Communities Initiative has not taken a position on this issue.
Lane Solutions welcomes readers’ comments and opinions on this or any issue presented in Lane Solutions.
Is It Time to End Oregon’s Death Tax?
Many agriculture, business organizations and citizen activist groups have united in a mission to end Oregon’s death tax. These groups are working to get Initiative Petition 15, the Death Tax Phase-Out Act, on the November 2012 ballot. A little more than 87,000 signatures are required to qualify for the ballot, but to ensure the success of this initiative supporters are preparing to collect 125,000 signatures by the end of June.
Oregon’s estate tax ranges from 10%-16%, with a $1 million deduction. This is separate from and in addition to the federal estate tax. Oregon is one of only three states west of the Mississippi to still have an estate tax; the other two are Washington and Hawaii. Since 2001, 29 states have repealed their death taxes, and the Governor of Indiana recently signed a bill into law to phase out Indiana’s death tax.
We all know this is a burden on family farms, ranches, and businesses. In a family business, where you might be land and equipment rich, but have limited cash at hand, it can be nearly impossible to pay the tax without selling the property or taking out a loan. These taxes also come at the worst time— at the death of a beloved family member.
The Death Tax Phase-Out Act phases out the current Oregon estate tax over the course of three years. Starting January 1, 2013, the current tax would be decreased in 25% increments each year until January 1, 2016, when the tax would be eliminated. Oregon death taxes by any unit of government would be prohibited.
The Death Tax Phase-Out Act would also protect families who are transferring property. Currently, Oregon families are subject to pay the capital gains tax on intra-family property transfers. This tax would also be phased out on the same schedule as Oregon’s death tax.
If you would like to sign the petition, you can go to endoregondeathtax.com, download the e-petition, sign the petition, and mail it in. If you would like to receive a volunteer circulation packet, or volunteer in other ways, please send an email to [email protected], or call 503.480.0523.
Bold Leadership Needed to Change Economic Course for Oregon and Lane County
By Christopher Gergen
Over the course of the last several weeks, we have discussed what economic factors will bring more business to Oregon and Lane County. Additionally, we have pulled the curtain off the many half-truths found in the political talking points found on both sides of the aisle concerning what creates economic demand (often-called economic stimulus) for goods and services originating inside the State of Oregon. Specifically, we have discussed:
- The Oregon Legislature has failed to create an environment to entice businesses to move to the state, let alone create sufficient jobs without such migration.
- The reason jobs are not currently being created is due to a lack of demand and a lack of demand doesn’t have anything to do with entrepreneurs, small business owners, and the wealthy creating jobs or taxation scaring investors away from starting businesses.
- Ultimately, it is you—the consumer—through the mechanism of demand that creates jobs and therefore it is you (with the aid of government and business) who possess the ultimate power to create the economic demand in Lane County and in Oregon at large.
- The Oregon Legislature should immediately move to repeal the economically damaging Measures 66 and 67, address the PERS crisis in a meaningful way that produces results, not rhetoric, and reduce government spending on wasteful or pet projects and redirect those funds to public safety and education.
- If businesses in Oregon would like to bend the cost of labor downward, they must make a serious push to enact Right to Work laws for Oregon workers. Additionally, they should enact corporate policies that pay Oregon workers living wages as opposed to minimum wages because doing so increases productivity, lowers overall turnover, and puts more cash into the hands of the people who create demand and drive economic growth.
Oregon has so much going for it—natural resources, deep-water harbors, an educated work force, beautiful universities, and many natural wonders. We have what it takes to move Oregon forward once again into prosperity and the success of Lane County is a major factor to making that happen. We can—we should—lead the nation in economic growth or in the least find ourselves in the top 5 best places to live, to work, to raise a family and to retire. The first step in making this goal a reality is repealing or reversing our slow growth and no growth policies that continually hold us back or worse—destroy the opportunity for new businesses to be planted and blossom in our great state. The time to acknowledge these needed changes has come to a head through the dire situations set before us. In order to change our course the general citizenry of Oregon must put in Salem and Lane County governments leaders who not only understand this but who will boldly act on it.
We can do it—but will we?
Creating Jobs in Oregon – The Role Of Business
By Christopher Gergen
In the last installment of this series we discussed specific steps that Oregon and Lane County governments can take to improve the climate for job creation in Oregon. They are:
- Restructure PERS. As it is currently structured, the funding demanded for fueling PERS is pushing Oregon toward the financial abyss that awaits somewhere between 20 and 31 other states in the not too distant future.
- Lower (or, preferably, eliminate) government spending for non-essential programs and projects and redirect these funds to essential functions such as public safety and education. Sending Public Utility Commissioners on junkets to Armenia and spending $900,000 on unnecessary bike path signs are not a formula for economic growth.
- Repeal Measures 66 & 67. Besides missing their revenue targets by about 50%, these measures have encouraged businesses and tax-payers to either locate elsewhere or leave Oregon.
To read the entire article which is summarized above, follow this link.
Today we’ll continue our discussion on job creation in Oregon by recommending steps that businesses can take to improve the economic climate.
- Enact Right to Work Laws. Right to work laws, governed by the 1947 Taft Hartley Act, prohibit unions and employers from agreeing that a union can require that the employees of a business join that union or pay union dues as a condition of employment. They have been enacted in 23 states.
In a paper published by the Cato Institute on the subject of the effects of unions on economic freedom and prosperity the authors note, “Right-to-work laws also appear to help economic development, as Palomba and Palomba (1971) and Moore and Thomas (1974) note, which can factor into the debate. Calzonetti and Walker (1991) present survey data showing that firms do consider right-to-work laws in their location decisions.”
Currently, Oregon is not a right to work state and as such is subject to the increased labor costs that inevitably coincide with the use of Union labor. If businesses in Oregon are serious about bending the cost curve of labor downward, they must make a serious push to enact Right to Work laws for Oregon workers.
- Achieve profitability that will justify paying wages that are in line with the local cost of living and that attract high quality employees. In times of economic downturn workers are forced to work in jobs for which they are underpaid and overqualified. This is a reality of supply and demand—when the supply of workers far outpaces demand for workers, wages decline or hold steady.
It’s important to note here that businesses can only pay wages that are justified by their profitability. It is my belief that, given the achievement of healthy profits, Oregon businesses will direct an appropriate portion of these funds toward paying competitive wages that will attract the best employees.
Obviously I am not advocating that anyone overpay labor in some feckless attempt at income redistribution. I am advocating that businesses pay competitive wages because, given the profitability that allows it, it is in their best interest to do so.
First and foremost, when businesses can afford to pay what it takes to attract highly productive employees they have a better chance of getting…and keeping them.
A “knock-on effect” is that when workers have more money to spend in the economy it naturally increases demand. And an increase in demand spurs economic growth and increases business revenues.
Again, I am not advocating that businesses forego funding expansion in an effort to “be nice” to employees. Business is not charity. It exists to return profits to its investors. But I am advocating that, given sufficient profits, business pay what is necessary (no more, no less) to attract and hold productive employees. The vast majority of businesses already do just that.
The net effect of increased productivity due to high quality employees and lower turnover is higher profitability. Higher profitability leads to business growth and increased employment…and higher wages.
I have now presented some ideas on the roles that both government and business can (and should) play in order to create job growth in Oregon. I’d love to hear your thoughts on this crucial issue.
In the next issue of “Lane Solutions” I’ll summarize the points I’ve made in this five part series and share some final thoughts on job creation in the Great State of Oregon. Be sure to come back and join the discussion.
1. http://www.cato.org/pubs/journal/cj30n1/cj30n1-1.pdf (p. 14)
Chris Gergen is a Springfield based financial advisor and is the author of The Quality Paradigm: Why You and Your Business Need it to Succeed. He blogs at Be Epic.Daily. He can be reached via email at [email protected].
More Demand = More Jobs; How Do We Get It in Oregon?
By Christopher Gergen
In this fourth installment of our five part series on job creation we are going to look at a few specific steps local and state governments must take in order to create more demand and begin the economic healing process in our state and county economies.
First, a brief summary of how we arrived at this point.
Both public and private sectors have significant roles to play in creating an environment that increases consumer demand, which is essential to the creation of permanent jobs. Though many would tilt the level of responsibility toward one or the other of these sectors, the burden of creating demand rests on both.
While both sectors are key players in job creation, ultimately it is you, the consumer, who through the mechanism of demand creates jobs. Therefore it is you who possess the ultimate power to create economic demand in Lane County and in Oregon at large.
Creating permanent jobs in Oregon and Lane County depends upon Oregonians spending money. While it is preferable to make these expenditures at locally owned businesses, we must also acknowledge that job creation occurs when an out of state company creates jobs in Oregon to satisfy increased local demand.
Local and state governmental bodies (the public sector) participate in local job creation by, when costs are equal, employing Oregon businesses and Oregon citizens to perform Oregon’s public business. So the government should spend Oregon’s tax revenue in Oregon’s economy whenever possible and prudent.
There is not room enough here to list all of the many issues state and local governments in Oregon need to address to aid in the creation of a healthy economy. However, here are three key issues that need to be addressed immediately:
1. Restructure PERS
The issues directly related to the huge shortfalls created by runaway PERS expenses are so complicated that I doubt there is a way to fix the system as it exists today. Thus I would not presume to offer a comprehensive solution for this issue at this time.
But I will assert that both Republican and Democratic leadership in Salem must muster the moral and political courage required to make tough decisions about PERS reform. Some might argue that there is an effort to get this done on both sides of the aisle, but at the end of the day, Oregonians understand that effort is nice—but results matter.
If Oregon’s Legislature and Governor do not address the PERS challenge meaningfully, Oregon will careen into a financial abyss with bankruptcy at the bottom. Already, many states are, thanks to their legislatures’ inability to make meaningful changes to their pension plans, staring into this abyss.
According to a paper published by the Nation Bureau of Economic Research, “Seven states (will) run out of money before the end of 2020, including Illinois (2018), New Jersey (2019), and Connecticut (2019). 20 states will run out by the end of 2025, and 31 states by the end of 2030.” The same research shows Oregon will run out of money in 2039—a mere 27 years from now (1). Unfunded pension liabilities are major contributors to these states’ predicaments. Clearly, the current PERS system isn’t sustainable for Oregon.
For more on the challenges Oregon faces from an unreformed PERS go back to the Healthy Communities Initiative home page, click on “Issues” and then click on “PERS.”
2. Lower (or eliminate) government spending for non-essential budgetary items and redirect this funding to essential budgetary items such as public safety and education
Examples of wasteful government spending in Oregon are legion.
Back in 2000, while Oregon was suffering the effects of an energy shortage, State government decided that the best use of several Public Utility Commissioners’ time, energy and salaries was to send them to seven countries, including Armenia and Zambia, to promote Oregon’s model utility system (2).
More recently, Oregon spent $900,000 of Federal stimulus money to erect, alongside existing bike signs, nearly duplicate signs, the only difference being that “…(they) include arrows, distance, and travel times to key destinations.” (3)
For every year (day?) between “The Utility Commissioners’ Excellent Adventure” and “Why Buy Just One Bike Sign When Two Will Do Nicely?” examples of laughable government spending abound.
3. Repeal Measures 66 and 67
According to Kiplinger, because of Measure 66’s increase of personal income tax rates and Measure 67’s increase in corporate taxes, Oregon is the fourth most unfriendly state for retirees, earning it a not-so-envied place on its “Do not live here in your second act” list (4).
Both measures discourage outside money from coming to Oregon and circulating in our economy. Measure 66 is, in reality, an incentive to people to move somewhere other than Oregon. This is especially true of high earners such as doctors, dentists, lawyers and others who, because their businesses are “Subchapter S” entities, have their business income taxed at personal income rates. Remember: high earners tend to be high spenders and investors – just the kind of people Oregon most needs.
Measure 67, with its tax on Oregon sales (irrespective of profits), discourages businesses from forming in or moving to Oregon.
Prior to the vote, the Tax Foundation predicted that, with passage of both measures, Oregon would drop six places in its ranking of states based upon business climate (5). Subsequent passage of these measures signaled to large and small employers alike that Oregon is not serious about creating an environment friendly to economic growth. The root of many of these damaging policies is Keynsian economics.
Many in Salem, agreeing with English economist John Maynard Keynes, believe that, in a stagnant economy, the government must inject money into the economy to drive economic growth. But the catch is that in order for state and local governments to do this, they must first extract this money from the economy through taxation—thus the rationale for Measures 66 and 67.
Somehow, the fact that this never works seems irrelevant to them.
It’s worth noting that these measures have utterly failed to produce their intended results. Besides damaging both supply and demand climates, Measures 66 & 67 have missed their revenue projections by a staggering 50% (6) and fallen victim to the economic certainty that when tax rates rise above a specific point, total revenue actually declines. The “cure” for Oregon’s budgetary woes has left the State with continuing, huge budgetary challenges.
In this installment of our series we’ve discussed what government actions do and do not create the demand that sustains a healthy economy. In the next issue of Lane Solutions we’ll look at the proper role of business in creating permanent jobs which lead to the demand we so desperately need in Oregon. Be sure to come back and join the discussion.
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1596679 (reference found on pages 14 and 27. You must download the paper)
- http://www.chicagotribune.com/features/tribu/sns-pgc-wastebook-2010-pg,0,4199163.photogallery
- www.cagw.org/assets/state-piglet-books/2002/2002-oregon.pdf – 2009-03-10. Open the first link on the page, scroll to “2002 Piglet Book” and scroll to “Travel Woes.”
- http://www.kiplinger.com/slideshow/TaxUnfriendlyStatesRetirees/5.html#top (10 Tax- Unfriendly States For Retirees 2011)
- http://www.taxfoundation.org/news/show/25680.html
- http://www.oregonlive.com/news/index.ssf/2010/08/measure_66_tax_revenue_coming.html
Chris Gergen is a Springfield based financial advisor and is the author of The Quality Paradigm: Why You and Your Business Need it to Succeed. He blogs at Be Epic.Daily. He can be reached via email at [email protected].
Creating Jobs in Oregon
By Christopher Gergen
“We cannot solve our problems with the same thinking we used when we created them.” – Albert Einstein
Solving the grave economic challenges facing Lane County and the State of Oregon cannot be accomplished by mouthing the same tired rhetoric based upon faulty assumptions about the economy. We need fresh, original solutions based in reality.
Over the course of the last two installments (Part 1, Part 2) in this four part series we discovered why the usual suspects of job creation—government, “stimulus spending,” entrepreneurs and small business—do not by themselves create permanent jobs:
- Government does not create jobs by legislating, taxing, and regulating businesses to the point they leave the state or decide not to move their companies to Oregon in the first place.
- “Stimulus spending” on infrastructure projects only creates temporary jobs while the project is in progress. Once it ends, the jobs end with it. Also, “stimulus spending” forces governments to raise taxes on everyone, which in turn drags down consumer spending, further depressing job creation.
- Entrepreneurs and small businesses can’t create permanent jobs absent demand for their products.
- When companies and small business owners invest capital into the marketplace they hire under the assumption that demand will be sufficient to sustain the new jobs. Should demand fail to support the venture, the jobs created are lost—and thus were temporary.
In this installment we’re going to discuss where sustainable jobs really come from. Then in our final installment we’ll examine the proper roles of government, small business, and consumers in creating a healthy economic environment.
Understanding demand is key to understanding how consumers behave and how market forces work. Today we’re going to focus on two types of demand: market demand and consumer demand.
The macro solutions for Oregon’s and Lane County’s economic ills are found in creating market demand for goods and services, which, in turn, is created by consumer demand. To accomplish this, the Oregon Legislature needs to create a healthy economic environment by slashing a burdensome regulation regime.
A 2009 study by Cal State Sacramento economists on the effects of the State Legislature’s over-regulation of the Californian economy (1) found “…that the total cost of regulation to the State of California is $492.994 billion, which is almost five times the State’s general fund budget, and almost a third of the State’s gross product. The cost of regulation results in an employment loss of 3.8 million jobs, which is a tenth of the State’s population.” Oregon faces a similar challenge.
Regulation kills businesses and collaterally kills consumer demand in Oregon because the consumer cannot demand an Oregon product from a producer that does not exist in Oregon. He or she may still demand the product, but it now must come from a more business friendly state.
The Oregon Legislature has the power to erode or even destroy Oregon’s market demand. That destroys existing jobs and discourages creation of new ones. It’s as simple as that. If the market demand for Oregon goods and services is artificially low or non-existent for goods and services in demand elsewhere, it’s most likely because the business environment in Oregon is not advantageous to the producer of that good or service operating profitably. That fact alone means that while demand could potentially be high for a particular good or service, it makes no difference to our economy because Oregon doesn’t produce or offer it—which means these jobs don’t get created.
Market demand, which creates and sustains jobs, is driven by individual (i.e. consumer) demand. A group of consumers all buying the same thing creates market demand. At its optimum, this demand can even shield a company against a severe recession. Apple is a great example.
In January, 2012 Apple posted enormous earnings and revenue for the fourth quarter of 2011. To put into perspective how well Apple performed, the consumer demand for its products and services created more profits ($46.33B) for Apple than Google had in total revenue ($10.8B) (2) (3). It’s worth noting that Apple not only isn’t laying people off; it’s hiring—but not in Oregon.
At the other end of the spectrum is General Motors. In early March, GM announced it was suspending production of its Chevy Volt for five weeks (4). Chris Lee, GM spokesman, cited the reason for the suspension of production was “matching (its) production levels with demand and building to market.” This “matching…production levels with (consumer) demand and building to market (demand)” caused 1,300 people to temporarily lose their jobs. The Chevy Volt has continuously missed its sales (demand) targets because consumers just don’t like the product —resulting in job losses.
Public and private sectors both have a role to play in creating an environment that increases consumer demand. In our last installment we will look at specific things the public and private sectors in Lane County and Oregon can do to increase demand for Oregon goods and services. Specifically, we’ll look at how permanently lowering and reallocating public spending can bring Oregon’s economy out of stagnation. Well also look at the role wages play in this process.
Be sure to join me for this discussion in the next issue of “Lane Solutions.”
Note: For further study on the subject of economics, please click here for a good primer: http://www.investopedia.com/university/economics/default.asp#axzz1rwn7hGc4
Chris Gergen is a Springfield based financial advisor and is the author of The Quality Paradigm: Why You and Your Business Need it to Succeed. He blogs at Be Epic.Daily. He can be reached via email at [email protected].
(1) http://hotair.com/archives/2009/09/25/study-regulation-costs-california-economy-almost-500-billion/
(3) http://investor.google.com/earnings/2011/Q4_google_earnings.html
(4) http://www.mlive.com/auto/index.ssf/2012/03/gm_to_stop_chevy_volt_producti.html
Private Sector Job Creation is the Answer to Long Term Stability
By Chris Gergen
Someone once said “If you tell a lie big enough and keep repeating it, people will eventually come to believe it.”
Such is the case concerning the economy and how jobs are created. In my last article I discussed the role government does and does not play in creating jobs. The irrefutable fact remains that governments do not create jobs. Rather, through taxation and regulation they create or destroy the ecosystem indispensable for the creation of permanent jobs.
Many believe that entrepreneurs, small business owners, the wealthy and those aspiring to become wealthy are the driving force behind job creation. As with the idea of government creating jobs, this idea of entrepreneurs, small business owners, and the wealthy creating permanent jobs is also incorrect.
According to Forbes Magazine[i], Phil Knight, Oregon native, co-founder, and former Chairman of Nike, is the 47th richest man in the world and the 19th richest man in the United States. Surely, if anyone could create permanent jobs it would be Phil Knight and Nike. Few people realize that neither Phil Knight nor Nike created any permanent jobs. Entrepreneurs like Phil Knight invest capital to design, develop, and deploy their ideas, services, and products until the capital runs out. Jobs created by entrepreneurs such as Phil Knight, small business owners and the wealthy are only as secure as the level of initial capitalization of the venture. As I mentioned in my last article, any jobs in Oregon and Lane County would be good jobs, but Oregon and Lane County need to look long term at sustainable, permanent solutions to their persistent unemployment problems.
Let’s look at where these permanent jobs come from.
According to those who argue that entrepreneurs, small business owners, and the wealthy create jobs, a key role of government is simply lowering taxes on “job creators” so they have the capital to invest in creating ideas, services, and products. However, this logic is not supported by the facts. Low tax rates by themselves will not create permanent jobs. During the boom years of the 1990s, the dotcom rage “created” thousands of jobs in the United States. Unfortunately, the boom of the 1990s was really a bubble that burst in March 2000 and sent the economy into a deep economic struggle, forcing the Dow Jones Industrial Average to finish lower than the previous year for the following three consecutive years[ii].
During the 1990s billions of dollars were invested by investors, entrepreneurs, small business owners, and the wealthy in creating thousands upon thousands of jobs in many different sectors. According to the logic of those who argue for lower tax rates so job creators can create jobs, the tax rates should have been low during this period. However, the truth is much different: the high bracket tax rate on “job creators” from 1993 to 2000 was 39.6% and in 2001, the tax rate was only lowered to 39.1%[iii].
The current rate of 35% in 2012 is below the tax rates of the boom years of the 1990s. If the idea of lowering taxes on the wealthy in order to create jobs were valid, entrepreneurs, small business owners, and the wealthy would currently be creating jobs hand over fist because our current rates are the lowest they have been in over 20 years[iv]. If you were to look for rates lower than our current rates, you would have to go back to the three year period of 1988 through 1990 when the rate was 28%. Before that, you would have to go back to pre-World War Two era rates of 24% and 25% in the mid-1920s and early 1930s.
During the boom years of the 1990s and into the aftermath of the dotcom collapse, the national unemployment rate hovered between 3.7% (December 1999) and 6.3% (January 2002)[v]—even with tax rates above 36%. The sudden rise in unemployment in the early 2000s was due to a lack of capital to continue funding these companies, which in turn was caused by a lack of consumer demand. As a result, not only did investors take a bath, but most of the thousands of jobs “created” by the boom suddenly disappeared—because they were temporary. Ideas, services, and products that people demanded — not tax rates or the single-handed efforts of “job creators”—caused the jobs boom of the 1990s.
The reason jobs are not currently being created is because of a lack of demand. And a lack of demand doesn’t have anything to do with entrepreneurs, small business owners, and the wealthy creating jobs or taxation scaring investors away from starting businesses. Fixing our economic woes in Oregon and Lane County begins by looking at the real problems.
The economy is bigger than the government, entrepreneurs, small business owners and the wealthy. The economy is comprised of all of us. In order to create demand, a few things have to happen legislatively and in the business sector. Be sure to come back to “Lane Solutions” – because that will be the subject of our next installment.
Chris Gergen is a Springfield based financial advisor and is the author of The Quality Paradigm: Why You and Your Business Need it to Succeed. He blogs at Be Epic.Daily. He can be reached via email at [email protected].
[i] http://www.forbes.com/profile/phil-knight/
[ii]http://stockcharts.com/freecharts/historical/djia2000.html
[iii] http://ntu.org/tax-basics/history-of-federal-individual-1.html
[iv] http://ntu.org/tax-basics/history-of-federal-individual-1.html
Where Jobs Come From
By Chris Gergen
With all of the discussion about the economy, jobs, taxes, and the business climate in Oregon, I think it wise that we address the one question that keeps coming up in the national media and local debates in Salem—who creates jobs? Generally, debaters of this issue take one of two sides: the government creates jobs or the private sector (specifically, the rich and those trying to get rich) and small business owners—create jobs. Those who advocate one side over the other argue passionately in favor of their position. What’s more, both sides of the argument have legislators and political influencers who, just as passionately, believe their position is correct. Would you believe both of them are ignoring a significant factor in “job creation?” And it’s a factor that is crucial to understanding why Eugene, Lane County, and Oregon lag in job creation.
Let me tell you what they’re missing…
Regardless of who holds power at the state or national level, most (if not all) government economic expansion programs focus on providing tax breaks or subsidies to companies to entice them to move from one state to another. This was a significant factor in the robust job creation from 2000 to 2009 in Texas. 21.6% of these jobs were the result of employers moving in from other states. An additional 23.7% can be attributed to international migration (1). Thus more than one fifth of the jobs created in Texas were the result of jobs lost in other states because Texas offered an environment that was highly attractive to out of state companies.
Here are two other relevant facts:
- Between 2004 and 2007, 61 California companies moved to Austin alone (2). Why? Reasons often cited are low taxes & labor costs, less union control, ease of obtaining permits, and less stifling regulations.
- A survey of U.S. executives revealed that Texas is number one among states in offering a friendly business environment (California, New York and Illinois bring up the rear) (3). Many attribute this to the elements mentioned immediately above. In an era wherein capital and labor are highly mobile, job migration is a factor that states ignore at their peril.
All of us would be happy to have jobs shuffled to Oregon and, especially, to Lane County. And given the length of time the Oregon unemployment rate has been above the national average (25 of the last 30 years leading up to 2008 [4]), I would agree that any job growth would be good job growth. However, I would caution that any jobs created by shuffling jobs to Oregon from somewhere else could be shuffled out of Oregon just as quickly with the passage of anti-business and anti-wealth legislation such as Measures 66 and 67.
Let’s focus on some of the damage, either already caused or anticipated, as a result of Measures 66 & 67:
- According to the Cascade Policy Institute, Measures 66 and 67 will result in the loss of at least 70,000 jobs (5).
- According to Kiplinger, because of the high tax rates imposed by Measures 66 and 67 (for its effect on passive income) Oregon is the fourth most unfriendly state for retirees. For those retirees with taxable income of $250,000 or more, Oregon shares with Hawaii the dubious honor of imposing the highest income tax rate in America. Taken together, these policies have earned Oregon a place on its “do not live here in your second act” list (6).
- The year following the passage of Measures 66 and 67, Oregon dropped six places on the Tax Foundation’s list of states based upon business climate (7).
- Besides damaging both business and consumer climates, Measures 66 & 67 have missed their revenue projections by a staggering 50% (8). The “cure” for Oregon’s budgetary woes has left the State with continuing, huge budgetary challenges.
Clearly, the Oregon Legislature has failed to create an environment that would entice businesses to move to the state, let alone create sufficient jobs without such migration.
Will Oregon and Eugene absorb these lessons? Will they learn that high taxes, stifling regulations and difficulty in obtaining permits here are a formula for job creation – in Texas?
Next month we’ll discuss the role of the rich and small business owners in creating jobs. Be sure to come back – you’ll be very surprised.
Sources:
- http://www.factcheck.org/2011/08/texas-size-recovery/
- http://www.myfoxaustin.com/dpp/video/Is-Texas-Stealing-California-Jobs?20120119-ktbcw
- http://www.bizjournals.com/dallas/blog/morning_call/2011/09/texas-has-top-business- environment.html
- http://www.bls.gov/. http://www.statesmanjournal.com/assets/pdf/J0131639327.PDF
- http://cascadepolicy.org/projects/more/measures-66-and-67-will-cost-70000-oregonians-their-jobs/
- http://www.kiplinger.com/slideshow/TaxUnfriendlyStatesRetirees/5.html#top (10 Tax-Unfriendly States For Retirees 2011)
- http://www.taxfoundation.org/news/show/25680.html
- http://www.oregonlive.com/news/index.ssf/2010/08/measure_66_tax_revenue_coming/2382/comments-2.html
Chris Gergen is a Springfield based financial advisor and is the author of The Quality Paradigm: Why You and Your Business Need it to Succeed. He blogs at Be Epic.Daily. He can be reached via email at [email protected].